Tech Incubators: Don’t Call It An Incubator

Tech incubators are so popular these days that they’re practically passe. With more than 800 of them, they’re just “too common” — to steal the words of one uppity boutique owner who once sneered at me when I asked for Calvin Klein sunglasses. But there’s a new class of company emerging that’s part incubator, mixed with a pinch of holding company, and a dash of venture capital. True, these companies bare many of the same marks as their incubator cousins, but their business models are unique. Some consider themselves merely holding companies, but I think of them as venture corporations. They try to combine the benefits of both small entrepreneurial firms and those of large companies.

To date, the best examples of venture corporations are those that focus on startups in one particular sector — whether it is the wireless Internet (Ignition, for example), B2B e-commerce (Internet Capital Group), or next-generation networking (Redwood Communications Group). Whereas a typical venture fund invests pell-mell in companies across a wide spectrum of industries and incubators rarely go further than providing seed capital and maybe some office space, venture corporations actually have a stable of world-class executives and advisers who get knee-deep into the operations of their portfolio companies. The objective of a venture corporation is to nurture and grow companies for the long haul instead of dolling them up for a quick flip.

“Don’t call it an incubator,” says Sanjiv Ahuja, CEO of Redwood Communications Group. Funded with a total of $135 million from Accel Partners, Goldman Sachs, Mayfield Fund, NEA, Redwood Venture Partners, and others, the company is setting out to create a family of optical networking, fixed wireless, and other cutting-edge networking startups. In addition to Ahuja, who used to run Bellcore (the joint R&D; lab of the Bell operating companies), Redwood Communications can draw on the talents of the partners at Redwood Venture, Raj Singh and Raj Parekh, who are also co-founders of the group. Singh is a serial entrepreneur, having founded a company that split into Cerent (sold to Cisco for $7.3 billion) and Siara (sold to Redback Networks for $4.3 billion), as well as having founded StratumOne (sold to Cisco for $435 million). Parekh is the former CTO of Sun Microsystems. “We provide a caliber of executives that no early-stage startup could get on its own,” says Ahuja. Redwood’s top-flight executives will jump from project to project acting as interim CEO, CTO, or marketing chief, until the startups find their own wings.

Similarly, the partners at Ignition will not just be investing in wireless Internet companies, but rolling up their sleeves to help with the nuts and bolts of the businesses they invest in. Ignition was founded in March by some former heavyweights from Microsoft and Craig McCaw’s cellular empire. The list of founders is formidable, including Brad Silverberg (who headed up the Windows group from 1990 to 1995 and helped lead Microsoft’s Internet turnaround), Steve Hooper (former CEO of McCaw Cellular, AT&T; Wireless, and Nextlink), John Ludwig (who headed up development for Internet Explorer, MSN, and Hotmail), programmer Chris Peters (ever hear of Word or Excel?), and Cameron Myrhvold (a top marketing exec and brother of chief scientist-in-absentia, Nathan).

Cameron explains what sets Ignition apart: “In the world today, money is a commodity. VCs, angels, even GE, are all throwing money at ideas. So what is the critical resource? It’s not money, and not even ideas, but execution. We are people with operating experience who know how to compete and win.”

Finding the talented hotshots to run these new companies is no easy task — and that’s one good reason why venture corporations may never be as prolific as incubators. In addition to its own roster of executive superstars, Internet Capital Group has a team of 50 recruiters that concentrate only on executive searches for ICG companies. It is headed up by Rick Devine, formerly the number-two money-maker at Heidrick & Struggles.

What all of these venture corporations have in common is that they are operating companies through and through. They mimic elements of GE or Berkshire Hathaway, more than those of Kleiner Perkins or Idealab. Venture corporations commonly take a 25 to 30 percent stake in the companies they invest in, and hope they never need to sell. “We don’t plan to jettison our companies,” says Cameron. “We own them because of what they do, not in spite of what they do.”

In the end, what these venture corporations are trying to accomplish is to combine the best aspects of small, entrepreneurial companies (agility, focus, passion, creativity) with the advantages of larger organizations (proven executives, financial strength, strong marketing, deep relationships, technical expertise). The trick will be to leverage the best of both worlds while making sure those worlds don’t collide.